Stock investing has always attracted retail investors. A newer form of stock investing is the Curated Stock Portfolio (CSP). For better visibility, these CSPs are displayed on the broking platform along with a variety of metrics. However, they do not provide the ‘real’ information needed for an informed investment decision.
The investment universe, asset allocation, screening method, rebalancing information, fact sheets and various disclosures are provided on these CSPs to enable easy evaluation and selection by the investors. However, the flood of information lacks depth and uniformity and might mislead the investor. In short, standardization of performance measures that can enable informed investment is a missing piece in the CSP ecosystem.
CSPs such as Smallcase, Wealthdesk, and many others offer retail investors a variety of stock and exchange-traded funds (ETFs) backed by research analysts and investment advisors and based on specific topics, strategies, sectors, and risk profiles. This approach gained traction, especially during the pandemic and even after the ticket size of portfolio management services (PMS) increased from 25 lakhs 50 lakhs, which probably moved many investors to CSP.
need for standardization
Our peek into the performance data available on websites hosting CSPs shows that most of these products have posted impressive growth, but there are concerns. First, the methodology for computing returns either varies or is not explicitly disclosed by some CSP providers. It is quite possible that these are the returns since the introduction of the product. However, there are some CSPs that do not disclose the product launch date.
Second, there is no defined/uniform period for which returns are calculated for the same CSP. For example, in the case of mutual funds, the regulator has prescribed a set of criteria for reporting returns for specific tenors and calculation methodology that enables comparison between peer MF schemes. However, CSPs hosted on brokers/aggregator websites provide returns for different tenors. For example, some products offer a CAGR of 6 years, while others offer it for 9 or 13 years. The possibility cannot be ruled out that the best performing period has been selected for displaying the returns for the CSP. All of this, however, also makes comparisons between similar CSPs difficult.
Third, the demonstrated returns for some of these CSPs, although true, appear to be quite unrealistic and volatile from a long-term perspective. Even the most active and alpha funds may not give such returns on a sustainable basis.
Thus, all this raises the issue of transparency in performance measurement of CSPs and the need to set uniform performance standards for their evaluation and monitoring.
what can be done
To put things in perspective, in case of mutual funds, a scheme can be valued on the basis of increase in net asset value, assets under management, comparison with benchmark, and so on. The regulations state that for schemes which are in existence for more than 1 year, compounded annual return should be given and for those schemes which are in existence for less than one year, the return should be treated as full return since inception. Should be. This information is provided in planning information documents, websites and other forums. While some CSPs follow a combination of the above metrics, the concern is a lack of standardization. In the case of PMS, SEBI has prescribed the use of time-weighted rate of return (TWRR) method to communicate past performance. Portfolio managers are required to submit a client reporting format that includes information about client account performance, the portfolio manager and the appropriate benchmarks. Perhaps CSPs can adhere to similar standards.
Globally, the CSP industry has been able to address this challenge by adopting and complying with industry-recognized Global Investment Performance Standards (GIPS). These standards are based on the principles of fair representation and full disclosure. It is pertinent to note here that there are few CSP providers in India who are providing fact sheets with rich data and disclosures as per global best practices.
CSP requires a standardized performance measurement format as prescribed by the regulator. This may include disclosure of certain performance metrics, benchmarks, assets under management, to name a few. In addition, some rating mechanism may be developed and published regularly by an independent agency/research houses which will bring transparency in the performance measurement of CSPs.
Mitu Bhardwaj and Rasmeet Kohli working with the National Institute of Securities Markets.